New Yorker Profile: Paul Krugman

A nice feature in the New Yorker begins as a fluff piece but eventually turns into a very lucid examination of contemporary economics. I particularly liked this explanation of "freshwater" versus "saltwater" economists, which I always thought was an interesting and convenient way to divide the field.

To some extent, this difference [micro vs. macro] also maps onto the divide between the “freshwater” and “saltwater” schools of thought in macroeconomics. Freshwater economists—who live near lakes, particularly at the University of Chicago, but also in Rochester and Minneapolis—are more likely to insist that macroeconomics be based on microeconomic foundations, which is to say that one should study large phenomena like recessions and inflation as functions of the behavior of many perfectly rational individuals. A freshwater economist might argue, for instance, that debt-financed government spending to stimulate the economy won’t have a significant effect, because people will realize that they will have to pay off that debt with higher taxes in the future, and so will save more in anticipation, leaving net spending essentially unchanged. Saltwater economists—who are to be found in coastal areas, especially at M.I.T., Harvard, and Berkeley—are more likely to allow that, at this stage of our understanding, it is excusable to study some macro phenomena without giving a complete account of their causal logic. Saltwater types are also more likely to include irrationality or other market imperfections in their models: they believe, for instance, that since it is clearly the case that prices do not fall immediately following a decline in demand but tend to be “sticky,” you should incorporate this fact, even if you haven’t yet got an account of why it should be so. It isn’t that freshwater types believe that actual people are perfectly rational—they just believe that making that assumption enables a more rigorous economics than is possible without it. After all, while there is only one way to be perfectly rational, there are an infinite number of ways to be irrational, and how do you choose? It all begins to look awfully arbitrary.

That last sentence does an excellent job summing up my frustration with the study of economics. Mapping out intersections of supply and demand curves can be satisfying for some, but those results always felt fraudulent to me.

Distinctive/Distiguished Academics

MR pointed me to this post about "possible models for Freakonomics 3." I'm not particularly interested in this topic, but what struck me was that the top three "models" (i.e. public intellectuals) are people that I read almost every day. I'm pretty sure that I could pick a Krugman, Gladwell or Cowen article out of a lineup nearly 100% of the time. Their styles of writing, research, critical thinking and debate have played a substantial role in furthering my post college education and sharpening my mind.

Paul Krugman writes an Op-Ed piece for the New York Times every Monday and Friday. He's also published about two dozen books, won the Nobel Prize in Economics, and cemented a spot as one of the most important economists of the late 20th/early 21st century.

Malcolm Gladwell's virtuosic ability to write about nearly any conceivable topic is almost maddening. His books are perpetual best sellers and every one of his New Yorker features is worthy of a careful reading.

Tyler Cowen is certainly the least well known of the this trifecta, but he may be the most prolific intellectual blogger in the world. His site, Marginal Revolution, is a treasure trove of interesting links, thought provoking analysis, and spirited debate. Other notable attributes: he reads no less than six novels at a given time; he's a film and music buff (old/new, American/international, indie/blockbuster...), he's also an expert on ethnic cuisine. I would bet that he sleeps less than four hours per night.

Conspicuous Conservation

I've heard this phrase a few times recently and I love it.

It's a contemporary twist on "conspicuous consumption", a concept introduced by a somewhat obscure, but very interesting economist by the name of Thorstein Veblen.

Conspicuous consumption is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.

Veblen articulated this concept in his 1899 book, The Theory of the Leisure Class. Although the concept was invented to describe the exuberance of his day, it could just as easily apply to the decadence of the 1990's tech boom,and might be the key factor in the subprime mortgage crisis.

Wall Street ruled the 90's and most of the 2000's. People who provided very little tangible value to society were heralded as geniuses and envied by nearly everyone. The modern day robber barons spent lavishly, partied hard and projected an image of infallibility. They created an entire new market for over-the-top goods and services, which inexplicably created public fascination, rather than a public outcry. Not only were these people purchasing obscenely unnecessary luxuries, but the average citizen was watching them do it on countless reality TV shows, magazine features, and internet sites. Americans of limited means emulated these folks and soon became mired in debt. The appearance of wealth and status could be purchased via credit card loan.

That was then. Now the market is in relative shambles, millions of Americans are out of work and it's no longer chic to display one's grotesque wealth. Now, "conspicuous conservation" is the name of the game. Considerations of thrift and environmentalism are now lauded as "recession chic". Is this a good or a bad thing?

Well, from a personal responsibility and environmental standpoint, it's great (although many people are being driven to these practices not out of altruism but by trendsetting). However, from a national economic perspective it might be bad in the short term. Much of the waste that was created over the past decades of irrational exuberance funded development and created millions of jobs. It's an interesting way to think about our cyclical economy.

How does the economy get better? Hopefully not with a return to conspicuous consumption, because that model is simply unsustainable and ultimately destructive. Our current era of conspicuous conservation is not the solution either, but it might well be the first step towards one. If this economic malaise lasts for a while, and trendy frugality evolves into a legitimate practice, then perhaps we can move our economy where it needs to go, that is, shift the workforce and prioritize new and sustainable sectors.

Money Supply

No commentary necessary.

Drinking Around the World

An interesting map of drinking ages around the world. Only a handful of countries appear to enforce a 21+ drinking age. The other notable states in that category are India, Indonesia and Pakistan. I've always known that the United States' minimum drinking age was high by world standards, but it seems even more odd when you consider that we're in the company of such culturally different nations.

[via Economix]

Credit Hedge

You may not like them and you may not understand them, but hedge funds and private equity firms are critical in restoring liquidity to the credit markets. Gone are the It's a Wonderful Life days of simple lending where your neighborhood bank issued you a mortgage and you payed them back the principal, plus interest over time.

Contemporary lending relies on securitization and shadow banking to keep credit flowing: the bank issues you a mortgage, bundles it with thousands of others and sells them as mortgage backed securities. This illustration makes it much easier to understand.

The Obama administration's latest plan (possibly to the tune of $1.9 trillion)subsidizes investments in these securities in the hopes of getting the money flowing again.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

That seems about as safe as any investment you can make these days, so what would stop funds from jumping all over this?

Add this to the Paulson bailout, the stimulus, the subprime bailout, the auto industry bailout and anything else that's floating around and the scale is staggering. When you step back and look at these remedies from afar, you get the sense that nobody knows what's going on and that we're spraying a 12 garden hoses at a house fire.

Stat Ball

There's a long but very interesting article in the New York Times Sunday Magazine about Shane Battier and the application of advanced statistics in basketball.

First, here are Battier's career stats:

10.1 points | 4.8 rebounds | 1.8 assists | .447 FG%

These are very unremarkable numbers, yet this article argues that Battier is one of the most efficient players in the NBA today. Take a look at this:

The Grizzlies went from 23-59 in Battier’s rookie year to 50-32 in his third year, when they made the N.B.A. playoffs, as they did in each of his final three seasons with the team. Before the 2006-7 season, Battier was traded to the Houston Rockets, who had just finished 34-48. In his first season with the Rockets, they finished 52-30, and then, last year, went 55-27 — including one stretch of 22 wins in a row.

Obviously there are any number of other factors at work here, but it would appear, at least anecdotally, that Battier's presence significantly increases a team's winning percentage.

In the article, Michael Lewis (author of Moneyball and Liar's Poker) talks about how the Houston Rockets are successfully utilizing new statistical models that emphasize a player's unselfishness and overall efficiency. They argue that in basketball, the goals of the team and the individual players are not necessarily aligned. The key to the Rockets' personnel model is that "...there is no statistic that a basketball player accumulates that cannot be amassed selfishly." This means that the traditional stats, like the ones I've quoted above, are not the best way to gauge a player's overall effect on the winningness of a team.

I found this to be a pretty interesting, but not particularly revelatory; this is the era of sports stats after all, and we've heard about these types of things before. What really blew my mind was the more granular application of these statistics on Shane Battier's defensive gameplanning. Battier, who typically guards the opponent's most dangerous scorer, is given a dossier before each game that outlines that player's most efficient tendencies. For example, is he more effective off the dribble or pass, when he drives to his right or left, or when he shoots from the baseline or the elbow. When a supremely intelligent player like Battier assimilates this information, he is able to put together a gameplan that allows him to dramatically reduce the efficiency of a player like Kobe Bryant or LeBron James. If he's doing everything correctly, Battier is essentially playing the most statistically effective defense possible given the opponent and his own physical abilities.

As I said, it's a long article, but it's definitely worth a look. I'll leave you with one more interesting little tidbit that will slightly diminish the joy of watching a live basketball game:

One statistical rule of thumb in basketball is that a team leading by more points than there are minutes left near the end of the game has an 80 percent chance of winning.

Don't you wish you sort of wish you didn't know that?

Nudge

I had a stopover in the Amsterdam Airport a couple of years ago and when I went to the restroom, I noticed that there were small images of flies painted inside the urinals. I suspected that they were to encourage people to aim properly, but never gave it much thought after I caught my flight home. Last week, I spotted this article in the Times that talked about the flies and referred to them as "nudges." Apparently, those little bugs reduced "spillage" by as much as 80%.

Richard Thaler, a behavioral economist from the University of Chicago describes nudges as:

a harmless bit of engineering that manages to “attract people’s attention and alter their behavior in a positive way, without actually requiring anyone to do anything at all."

Nudges seem like a great idea as long as they're cheap and easy to implement relative to the projected payoff. The flies in the urinal are a great example of a high upside, minimal downside situation where the worst case scenario would be that the Amsterdam Airport might look silly because they spent a few hundred dollars to affix these images to their toilets.

There are other ideas for nudges laid out in this article that I'm not sure qualify as nudges at all. For example, Mr. Thaler calls for "rigorous public disclosure of leverage" in all financial institutions. I think that's a great idea, but to refer to it as a "nudge" minimizes both its importance, and onerous nature.

Anyway, I thought this concept was interesting when I read about it last week, and now it just became 5,000 times more intriguing. I'm going to submit some of my best "nudge" ideas and hopefully become $5,000 richer. Why don't you give it a try too?

Shiny New Penny

The United States Mint unveiled four new penny designs today that commemorate the life of our 16th President Abraham Lincoln. I'm still not fully recovered from the thrill of the Sacajawea dollar and the 50 State Quarters, so this announcement really rocked my world.

Seriously though, do we even need pennies? I remember reading some compelling arguments in favor of retiring the penny in my favorite economics blog a while ago (yes, I have a favorite economics blog). So I went over to Marginal Revolution and was reminded of these interesting points:

1. It sounds conspiratorial, but the penny retirement discussion is often squashed by special interest groups aligned with the zinc industry.
2. Pennies cost more than $0.01 to make.
3. Would prices go up or down? Probably up, but not by much.

I vote to abolish the penny. My apologies to the zinc miners of America.

Financial Transactions Tax

The 2008 Year In Ideas issue of the New York Times Sunday Magazine might have been the best issue I've ever read. There were several items here that caught my attention, and a I hope to write about all of them at some point, but I'll start with one that seems particularly timely.

The concept is simple:

impose a small tax on the sale or transfer of stocks, bonds, derivatives and other securities, thereby encouraging people to “buy and hold” rather than to engage in the frenetic transactions typical of a speculative bubble.

This appeals to me for many reasons.

1. It essentially penalizes people who make a living exploiting incremental ups and downs in the market, or arbitrage across different markets. These transactions add no value and are nothing more than a numbers game that has very little to do with the inherent value of an entity. Markets are powerful and efficient, but I'm not sure that split second timing of fractions of percentage points is legitimate. At the very least, it would be useful to make these people pay a steeper price.

2. It raises desperately needed tax revenue from a place that was in many ways the root cause of our current financial calamity.

So, political arguments aside, why wouldn't this be a great idea? I posed this question to some of my finance friends and they came back with:

I think it would deter a lot of bond investors where returns are minimal to begin with. Also if you have a couple million dollar retirement portfolio and you are making a few big trades a year or a redistribution, that will come out to a lot of money in taxes you are paying.

Both valid points. I understand the bond argument, and it's certainly a good idea to keep that market liquid, so perhaps they could be omitted. I think it's most important that this tax be applied to stocks and derivatives in order to dissuade speculative day traders and those folks who enjoy turning weird things into tradable commodities a la CDO's, CDS's, etc.. They should have to pay a fee at each stage of derivation (?) if that makes sense. The benefits here are numerous - generate revenue, slow down this phenomenon to allow for more appropriate oversight, and decrease the incentive to perform such transactions in the first place.

Again, I'm not sure how any of this would be implemented or if it even makes much sense. It just seems like a good idea to me.

As for the retirement portfolio argument, there are already plenty of tax incentives built into 401k's and whatnot, so it wouldn't be terribly difficult to add an exception there as well.

Comments are welcome.

Rabbit, Run

I had wanted to read Rabbit, Run for years, and I finally got around to it this past summer. I found the book to be a bit laborious to get through the first time around and I've not reread it for this post, so let this serve as a disclaimer that my plot synopsis may not be spot on.

Rabbit, Run is the first in a quartet of novels about an erstwhile small town high school basketball star, Rabbit Angstrom, and his personal struggles with the confines of middle class American family life. One day, Rabbit is driving home from his job selling kitchen utensils when he realizes that he can't stand his life anymore. He decides that his wife is a dolt, his young child is obnoxious, his in-laws are jerks and his life is just unbearable overall. With this in mind, and little else, he keeps driving past his house, onto the Pennsylvania highway and beyond. His road trip is brief and it fails to satiate his itch for change, so he eventually makes his way back towards his hometown where he seeks out his old basketball coach, Marty Tothero, who now lives at the YMCA.

As is evident from his living arrangements, Coach Tothero isn't doing very well for himself and definitely shouldn't be looked to for guidance and advice, but that is exactly what Rabbit does. Soon, Rabbit and Coach Tothero double date (with prostitutes we later learn) at a local Chinese restaurant. Despite his date's caked-on makeup and rotund figure, Rabbit is smitten and makes a series of very strange sexual advances seeking validation, conquest and adventure from an ugly prostitute. Well played Mr. Angstrom.

For several weeks, Rabbit actually shacks up with Ms. Unattractive Prostitute lady (her name is Ruth) and, ironically, they live life like a married couple. This goes on for a while and Rabbit tries to coerce his concubine into performing certain sexual acts. Her reluctance is somewhat odd considering she is a prostitute. Well, Rabbit finally gets what he wants (spoiler: it's a blow job) and then learns that his wife is having their second baby, so he rushes to the hospital to be with her.

Rabbit is accepted back into his former life by his dimwitted wife and snooty in-laws who are mostly just concerned about how embarrassing this whole ordeal has been. Rabbit sticks around for a while but eventually runs back to Ruth. His wife, who thinks he's left her for good, gets roaring drunk and accidentally drowns their infant baby in the bathtub. Rabbit returns home, believing that the death of his daughter was in no way his fault. Oh, and then he finds out that Ruth is pregnant and she wants him to either file for divorce or else she'll have an abortion. The novel ends with Rabbit running again. For like, the third time.

Alright, that was a glib plot overview, but in my mind there are a few important points to be made about Rabbit, Run.

Style

Rabbit, Run is a gorgeous piece of writing; a 300 page clinic on rich, highly descriptive storytelling. However, the price of such detailed exposition is tedium, and throughout Rabbit, Run, you can't help but think that Updike could have described a scene in one page instead of five.

Updike

When a literary legend passes away, you can always count on an abundance of terrific essays and retrospectives to appear. My favorite piece on Updike appeared in New York Magazine. It was short, simple and focused on the two words that best describe the man (you could also include "misogynist", but these pieces tend to be very kind when dealing with the departed¹).

1) Prolific

The man wrote three pages a day, five days a week for 50 years. I probably write more than three pages of email per day, but this man cranked out thousands of words of elegant, timeless, Pulitzer Prize winning prose. In his lifetime, he published over "twenty-five novels and more than a dozen short story collections, as well as poetry, art criticism, literary criticism and children's books."

2) Belletrist

I had to look this word up when I was reading the New York Magazine piece, and after I learned the etymology and definition, I can see why it was used several times to describe John Updike.

belletrist

1. literature regarded as a fine art, esp. as having a purely aesthetic function.
2. light and elegant literature, esp. that which is excessively refined, characterized by aestheticism, and minor in subject, substance, or scope.
Origin: belles-lettres; French: fine letters.

Updike is a master of observation and Rabbit, Run reads like a stream-of-consciousness novel in many ways because the descriptions of people, places and feelings are so copious. No minutiae is spared from Updike's elegant treatment and the weight of these observations can sometimes be crushing. At time it can feel like we're privy to too much narration and inner monologue and the story can get bogged down a bit. Ultimately, this is a small price to pay for some of the finest American writing of the twentieth century. The man was a virtuoso wordsmith.

Morals

A man leaves his pregnant wife and young child to shack up with a shady prostitute.

This would appear to be a black and white case of unscrupulous behavior, yet Updike manages to insert all sorts of shades of grey into this tale, and actually paints Rabbit as a somewhat tragic figure.

Aside from the excellent descriptive writing, I think this is the most incredible aspect of Rabbit, Run. What should be a clear cut ethical transgression is somehow transformed into an interesting debate about the stifling confines of middle America and the "American dream." Is Rabbit's philandering and restlessness a heroic rebuke of the shackles of small town American family life? Perhaps Rabbit is a tragic character because he is true to himself, albeit in a grotesquely irresponsible way. There's something loveable about this man even though there almost certainly shouldn't be.

Conclusion

Read Rabbit, Run because it's a classic, but don't expect a page-turner. It takes some work to get through this dense novel, and it's easy to let your mind wander, but try to be mindful of the richness of the descriptions and the power of Updike's observations.


1. I'm basing this off of a terrific essay by David Foster Wallace. And yes, the use of a footnote here is itself an homage to DFW.

Reading List

My approach to reading is a bit weird. I love to read, but I don't necessarily do it for entertainment, I do it for enrichment. Many times I've found myself trudging through a ponderous novel that requires a considerable amount of mental exertion and focus, and asked myself, why?.

Why? Probably due to a mix of obsessive compulsive disorder and a lifelong pursuit cultural literacy.

To this end, I'm usually reading at least three or four books at a time, and a one them is usually from a list I found called "Time Magazine's All Time 100 Novels: English Language Works From 1923 to the Present." So far I've read 21 of the books on the list (22 when I finish The Crying of Lot 49). I'm going to start writing mini-reviews of the novels on the list, along with a few others, in no particular order. I've read some of these novels very recently, some more than once, and others have not been read since high school. I'll try to focus on the ones that are freshest in my mind first.